Welcome back to our course on FinTech Security and Regulation.
I mentioned in my last video,
there were a lot of creative ways that companies were
using ICOs to maybe fund their business,
their startup, and sometimes,
regulators are thinking this looks like a security.
Well there's an interesting example of a government in the US getting excited about
ICOs and wanting to issue their own blockchain currency as a municipal bond,
and that's the city of Berkeley, California.
A place in Silicon Valley with many startups,
a lot of interest in technology in general, a lot of wealth,
a lot of capital, and a lot of people that would like to invest in their community.
And so, in this government,
there has been an overwhelming vote by the city council to be the first pioneer in
the US to be a municipal-launched crypto municipal market bond.
What they'll be using as an ICO to bypass Wall Street,
to bypass traditional law,
mutual fund markets where you would go on Wall Street and issue rewrote instruments to
large investors and large corporations and they said,
"No we're just going to go out to the community and issue this instead
of in $5,000 minimum size bonds in 5,
10 or $25 US increments that any investor could buy into."
They can get their payments and they're kind of
figuring this out now but maybe even in cryptocurrencies,
maybe we'll pay you interest in Bitcoins or maybe we'll pay you interest in
our own crypto municipal bond interest units or maybe we'll pay you in cash.
It looks sort of figure this out as they're going along but
the idea is a municipal bond which becomes
an ICO or what they call here an
initial community offering instead of Initial Coin Offering.
But it's a variation on an initial coin offerings of a municipal bond,
which bears an interest rate and this tax-free and some other nice things.
Okay. So, why is Berkeley doing this?
Well. One, they like tech and they're kind of excited about tech.
Two, it's kind of cool.
Three, it allows small investors to join-in in ways that they couldn't before.
So it opens up the market to people maybe people write
in their local community who would say we'd like to join-in
this $3 million fundraising effort which will be to
fund an expansion of fire protection services for the city.
Largely positioned as buying a new fire engine and they're probably has
more to buying the new fire engine than spending $3 million on a vehicle,
there's fire horses and other equipment and other things associated with it.
So lots of stuff related to the fire department.
Rather than issuing a municipal bond to fund that,
paid for out of city future income,
we're going to issue a cryptocurrency bond.
So that's a creative application.
One thing this is interesting as it illustrates that
governments don't always work the same and they don't always agree with each other.
So even within the US you've got
State governments thinking about whether
crypto should or should not be regulated and how.
Federal government's thinking about what they should do and
regulation and how they should the police are regulate various things.
The Federal Reserve worried about
what crypto currencies in general mean for their loss of
control and loss of visibility of what's happening with their own money supply.
So the Federal it's concerned about this and asking,
"Should we be thinking about crypto currency as a currency in use across the economy?
Is it part of the money supply?"
So various different regulators worried about different aspects of FinTech,
ICOs, cryptocurrencies, securities et cetera.
State, city, federal, international community interests,
swift banking business and worried
about what should or should not happen with crypto something.
So, for example, some people say, "Oh, by the way,
one of the uses of Bitcoin or Ripple or
other cryptocurrencies is you can change money from Deutsche Marks.
Well, sorry, euros in Germany not Deutsche Marks today but euros or Swiss francs
to Australian dollars or Japanese yen with less transactions fees."
This may be cheaper than traditional banking and if you move fast in,
in-and-out of ripple, for example,
used for banking transfers like this,
it may cost you less than using
a typical international banking clearing system for currency conversion.
If you're an in-consumer,
a Filipino maid in Hong Kong might find Bitcoin is a cheaper way of
getting Hong Kong dollars converted into Philippines pesos and sent to the Philippines.
Just convert it to Bitcoin,
tell your family here's my Bitcoin wallet
and they can withdraw their money in local currency
cheaper than you can wire money or transfer it otherwise across international borders.
So that's also a use of cryptocurrencies.
So, regulatories are a little concerned that we may lose track of money supply.
We may lose track of foreign currency in and out of our economy.
We don't know how much is still
domestic Bitcoins or how much is transferred to another country.
We're not sure who owns it,
how much they own,
how much is out there as an alternative form of currency.
But any rate, Berkeley is an interesting example.
They are not the first,
they're not the last but they are certainly
the largest municipality offering a crypto municipal bond in the United States.
They are pioneer in that.
There have been some community-based park cleanup projects funded
with neighborly or other things that bits of small things but nothing even
beginning to approach the scale of what would have been originally
a Wall Street offering of a municipal bond and
now is a peer-to-peer lending and a crypto market.
That's intriguing and so that's a new example,
a new type of something that you might worry about and regulate,
but it's a government doing it.
We have other governments doing things like starting to look
at should they be issuing their own digital currency.
Russia coming up with a CryptoRuble,
Greece thinking you may not trust their currency so we'll issue a Greek-based ICO.
I have to say a little skepticism here.
I'm not sure I trust any government that has trouble with their own currency,
whether it's Venezuela or Greece or Russia.
If you're having trouble with your own currency or having some struggles and you
think crypto is going to be the answer in the short-term, maybe it will.
But in the long-term,
why on earth would you as an investor trust
a government-issued cryptocurrency when
you don't trust the government's own fiat currency?
I'm not sure you're suddenly going to say,
"We don't like your traditional currency therefore we will
trust your cryptocurrency more than your fiat currency."
I don't think that's a safe bet.
But there isn't a lot of enthusiasm.
There's a lot of interests including from
various governments in the crypto market in general. Thank you.
Theodore Henry King CLARKAssociate Professor
